QUESTION: 1537

In 1994, Butler Inc. issued $10 par value common stock for $25 per share. No other common stock transactions occurred until March 31, 1996, when Butler acquired some of the issued shares for $20 per share

and retired them. Which of the following statements correctly states an effect of this acquisition and retirement?

Retained earnings is increased.
Additional paid-in capital is decreased.
Additional paid-in capital is increased.
1996 net income is increased.
1996 net income is decreased.

Answer(s): B

Explanation:

When common shares are reacquired and retired, common stock par value is decreased by $10 per share and additional paid-in capital is decreased by $15 per share, cash is decreased by $20 per share, and $5 per share increases additional paid-in capital. Accounting rules do not allow a firm to record a gain or loss when it buys back treasury stock because the transaction is viewed as an equity transaction. Therefore, the effect is to decrease additional paid-in capital.

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QUESTION: 1538

A liability can be recognized when

an obligation exists to make a future payment based on a past event
all of these answers
only when the amount is certain
any time a future payment is due

Answer(s): A

Explanation:

The amount need not be certain and some future payments such as wages to be paid in the future may not be reported as liabilities.

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QUESTION: 1539

A firm had an operating cash flow of 4,500, financing cash flow of 1,200 and an investing cash flow of -900. The firm has announced common stock dividends of 45 and preferred stock dividends of 23. If the outlays for maintenance of current capacity is 310, the firm's free cash flow equals ________.

4,445
5,345
4,122
4,145

Answer(s): C

Explanation:

FCF = Cash from operations - outlays for maintenance of current capacity - dividends declared. In this case, FCF = 4,500 - 310 - 45 - 23 = 4,122.

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QUESTION: 1540

A firm using LIFO accounting has a LIFO reserve of 500, with a LIFO ending inventory of 2,300. It is currently in the 35% tax bracket. If it switches to FIFO accounting, its ending inventory would be reported at ________.

1,305
2,800
1,800
1,805

Answer(s): B

Explanation:

LIFO Reserve = FIFO Ending inventory value - LIFO Ending inventory value Therefore, 500 = FIFO Ending inventory value - 2,300, giving the value of the ending inventory under FIFO = 2,800.

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QUESTION: 1537

Explanation:

QUESTION: 1538

Explanation:

QUESTION: 1539

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QUESTION: 1540

Explanation: